King & Wood, P.A.

Tax Strategies for Different Stages of Aging

“We’re conditioned to think of 65 as the tipping point into old age. At least we used to. Actuarial tables combined with the attitude that ‘70 is the new 50’ mean that you can and should consider clients’ needs for protection from taxes at three distinct stages of old age.”

Defining “late old age” must consider factors like health, mental status, family history and plain old luck, says a recent article from Financial Advisor, “Tax-Smart Wealth Transfer Tips For Clients In Late Old Age.” However, imagine this scenario: a person in late old age is often widowed and, if they are well-to-do, has more assets than they are likely to spend in their remaining years after accounting for reserves needed for long-term care.

At this stage, it’s important for the person to have an estate plan in place, with named beneficiaries on any retirement and investment accounts, and have taken steps to minimize taxes heirs will be liable for upon their death. If this planning has not been done yet, there’s still time—but there’s no time for delay.

Recent changes in the treatment of inherited retirement accounts and events like deaths, births, or marriages in the family mean every plan needs a close look at least annually. What else needs to be done?

• Directed, consistent, constant dollar levels of withdrawals from traditional individual retirement accounts (IRAs). This avoids being catapulted into a higher tax bracket. Charitable donations should be used, while enough IRA assets should be retained to take advantage of lower tax brackets coming in late old age.
• Topping off required minimum distributions (RMDs) with voluntary withdrawals to fund Roth conversions, starting when the individual was married, and the spouse was alive when couples enjoy more advantageous tax levels than singles.
• This is also the time to contribute to donor-advised funds (DAFs) or the family foundation by selling highly appreciated stocks. If one spouse’s death was anticipated, a share of appreciated stock held in joint accounts could be transferred to a separately owned account to gain the step-up at the spouse’s death.

After the work has been done and you enter late old age, there are three priorities to keep in mind:

• Be sure the beneficiaries in your IRA reflect your current preference and minimize the beneficiaries’ taxes from traditional IRAs.
• Confirm that the person named as your executor understands your investments and bequest preferences and is ready to take on the tasks to come in the future.
• In the case of imminent inheritance tax liability imposed by federal or state law, speak with your estate planning attorney about how a planned charitable gift or other means of minimizing estate taxes might be accomplished.

Can beneficiaries’ tax burdens be minimized? Consider these options:

• Switching IRA beneficiaries to grandchildren or younger family members in lower tax brackets, since non-spouse beneficiaries have only ten years to empty the accounts.
• Helping wealthy children who don’t need inheritances designate their children or others in the family’s next generation as beneficiaries of other non-IRA assets in the estate.
• Make a planned charitable gift to avoid federal and state inheritance taxes and capital gains taxes on appreciation the estate will owe before probate is completed.

An experienced estate planning attorney can handle legal filings after death. Nevertheless, the exact attorney needs to be part of the team, including a competent executor aware of your intentions and a financial advisor familiar with your assets and transaction history.

Reference: Financial Advisor (Oct. 3, 2023) “Tax-Smart Wealth Transfer Tips For Clients In Late Old Age”

What You Should Know about Inherited IRA

“Navigating the often complex world of inherited individual retirement accounts (IRAs) can be daunting, especially in the wake of losing a loved one.”

Inheriting an Inherited IRA can be even more complicated than the already complex world of inherited Individual Retirement Accounts (IRAs). Understanding the rules and regulations about inheriting an inherited IRA is critical to avoid major tax pitfalls, according to a recent article from yahoo! finance, “What Happens When I inherit an Annuity?”

After the passage of the SECURE Act, the rules concerning inherited IRAs became quite restrictive. Working with an estate planning attorney knowledgeable about IRAs can be the difference between a healthy inheritance or an unexpected huge tax liability.

An inherited IRA is an IRA left to a beneficiary following the death of the original account owner. The beneficiary who inherits the IRA can pass it to a successor beneficiary upon death. This creates the “inheriting an inherited IRA” scenario.

If the line of succession is not set up correctly, there is the potential for inherited assets to go through probate for a judge to rule on the rightful owner.

The original beneficiary is the first person to inherit the IRA. Once they have inherited the account, they may name their successor beneficiary. There are rules for the original beneficiary and the successor beneficiary.

The SECURE Act changed the timeline for inherited IRAs. It eliminated the “stretch” IRA strategy, which allowed beneficiaries to take distributions over their lifetime, stretching out the tax-deferred growth of the IRA over decades. Now, most non-spouse beneficiaries must withdraw all assets from an inherited IRA within ten (10) years of the original account holder’s death. This change presents new implications with regard to taxes, especially if the beneficiary is in their peak earning years.

Inheriting an inherited IRA can involve complex tax rules and pitfalls. There are timelines for taking required withdrawals and zero flexibility for mistakes.

You’ll also need to be sure the inheritance is documented correctly to avoid potential probate.

The rules differ for spouses inheriting an IRA since they shared assets with their deceased spouse. The SECURE Act allows spouses to treat the IRA as their own, providing more flexibility in distributions and potential tax implications.

Understanding the concept of Year of Death Required Distributions is essential. Let’s say the original owner was over a certain age at death. In this situation, a Required Minimum Distribution (RMD) may need to be taken in the year of death, which could impact the heir’s taxes for that year.

Knowing potential tax breaks related to inherited IRAs will also help with financial management. Non-spouse beneficiaries can deduct the estate tax paid on IRA assets when calculating their income tax.

These are complex issues requiring the help of an experienced estate planning attorney. Ideally, the conversation about what happens when you inherit an inherited IRA should occur while creating or revising your estate plan.

Reference: yahoo! finance (Sep. 5, 2023) “What Happens When I inherit an Annuity?”

Should You Have a Roth or Traditional 401(k)?

“The 401(k) was built on a simple idea. Set aside money from each paycheck to save for tomorrow and get a tax break today. Many workers now have another option: Save the tax break for tomorrow, too.”

The Roth 401(k) is a relatively new retirement savings tool funded with after-tax money and tax-free growth. It’s like the Roth IRA but with an additional benefit: workers may save significantly more than possible in an IRA, and often, there is a company match. A recent article from The Wall Street Journal, “Roth v. Traditional 401(k): Where to Put Your Money for Retirement?” examines the options.

Roths aren’t the best choice for everyone. Deciding how much to fund a Roth versus a traditional retirement account requires calculating your current spending, future taxable income, and some other unknowable factors—like life expectancy. Despite the choice's complexity, it offers the ability to reduce lifetime tax bills and leave more money for retirement and heirs.

The money withdrawn from a Roth can be tax-free, so it’s excellent for supplementing taxable income during years when retirees would otherwise be pushed into higher tax brackets. Starting in 2024, Roth 401(k)s will be exempt from the required distributions with traditional accounts. Roths can be left intact for heirs, although the accounts must still be emptied in ten years.

The best candidates for Roths are those who anticipate they’ll be in a higher tax bracket in retirement than now, which fits younger workers with years of raises ahead of them. For mid-career earners, it can be hard to tell whether they’ll be in a higher tax bracket during retirement. Some sources of retirement income, including Social Security and pensions, can provide some estimates of benefits. It’s still difficult to accurately predict the investment returns used to determine retirement account withdrawals.

How to decide? Start by comparing your current tax rate and the rate you expect to pay in retirement. For younger earners, the math favors the Roth. Some experts say once a person moves out of the 12% bracket, it’s best to start dividing savings between a Roth and a traditional 401(k). One rule of thumb: add 20 years to your age and put this percentage of money you are saving for retirement into a traditional 401(k), with the rest in a Roth.

If someone retires at 60 and their taxable income falls, it can present an opportunity to convert a traditional IRA or 401(k) savings into Roth accounts at a low tax cost.

Another tactic is the mega-backdoor Roth conversion, which can allow high earners to build a nest egg of tax-free retirement savings without giving up traditional 401(k) contributions and the tax breaks from making them.

Other reasons to consider Roth contributions? Your tax rate is likely to stay the same. To move a large amount into a Roth, big savers might want to contribute to a Roth while working and look for opportunities to convert money while temporarily in a lower tax bracket.

If you think tax rates will increase, as when many tax cuts enacted by Congress in 2017 are scheduled to expire, the Roth is a good way to protect from higher tax rates in retirement.

If you want to leave your 401(k) to heirs, they will have ten years before they need to empty the account, with no tax consequences. The tax-free nature of a Roth withdrawal, IRA, or 401(k) makes it well worth considering.

Reference: The Wall Street Journal (September 2, 2023) “Roth v. Traditional 401(k): Where to Put Your Money for Retirement?”

A Roth Conversion Can Benefit Retirement Plan

“Under the Secure Act, most Roth IRA beneficiaries must empty the account 10 years after the original owner's death. Unlike with traditional IRAs, however, they need not take distributions in years one through nine.”

Before 2020, leaving a traditional IRA to younger beneficiaries created dual tax breaks. The original owner reduced taxable income by making pretax contributions during their lifetime, and beneficiaries could stretch the benefits of tax deferral over their lifetime. All that ended with the SECURE Act, but there are some options, as explained in the article “Why a Roth Conversion is a Powerful Estate Planning Tool” from Think Advisor.

After the SECURE Act, beneficiaries who don’t qualify as “eligible designated beneficiaries” or EDBs must empty the inherited IRA account within ten years. If the original owner had already begun taking minimum required distributions, the beneficiary must also take annual RMDs during the ten-year distribution period.

Someone who inherits a traditional IRA must now pay taxes on the entire account balance within ten years of the original account owner’s death. This can be a sizable tax burden, especially if the beneficiary is in their peak earning years.

Roth beneficiaries who don’t qualify as EBDs must empty the account within the same ten-year distribution period applying to traditional IRA accounts. However, Roths have a decisive advantage during the original owner’s lifetime: no RMD rules.

The original owner will always be deemed to have died before their required beginning date because a Roth account can never go into pay status since there is no required beginning date for distributions. Therefore, the Roth IRA beneficiary can wait until the tenth year to empty the account, allowing the funds to grow tax-free without worrying about the tax hit in Year 10.

When the beneficiary eventually takes distributions, the original contributions are nontaxable because the original owner paid taxes on Roth contributions during their lifetime. If the five-year rule is satisfied—at least five years have passed since the original owner made their first contribution or conversion to the account—earnings will also be tax and penalty-free to beneficiaries.

Roth accounts benefit the original owner because they offer a tax-free source of income during retirement. However, they’re also a valuable tax-free gift for account beneficiaries.

Reference: Think Advisor (Sep. 1, 2023) “Why a Roth Conversion is a Powerful Estate Planning Tool”

How Does the IRS Rule on Inherited IRAs Work?

“Before the original SECURE Act, IRA owners who died were able to leave their accounts to their children, grandkids, or other non-spouse individual beneficiaries, and heirs could stretch required minimum distributions (RMDs) over their own lifetimes, thus allowing the funds in the accounts to grow tax-free for decades.”

Before December 2019, when the SECURE Act became law, inherited IRAs were powerful means of passing along wealth. However, Congress saw this as a loophole and ended it with the 10-year clean-out rule. IRA rules are more complicated now, according to the article from Kiplinger, “IRS 10-Year Rule for Inherited IRAs: Kiplinger Tax Letter.”

There are exceptions to the clean-out rule for beneficiaries who are surviving spouses or minor children of the account owner or beneficiaries who are chronically ill, disabled, or not more than 10 years younger than the deceased IRA owner. For minor children, the exception applies until they reach the age of 21. Then they must empty the account within 10 years.

Unlike other beneficiaries, a surviving spouse may take an inherited IRA as their own. The old rules also apply to people who inherited IRAs before 2020. They can continue to take advantage of the IRA stretch strategy.

For everyone else, the 10-year rule has led to much confusion. Do withdrawals have to be equal amounts every year for 10 years, or can different amounts be taken out at different times during the 10 years? The IRS interpretation originally led many professionals to think annual payments weren’t required and an heir could wait 10 years, then take all the money out in one lump sum.

Further confusion was created in March 2022 when the IRS issued proposed rules based on whether or not the original IRA owner died before or after their first beginning date for taking Required Minimum Distributions. If they died before taking their first RMD, beneficiaries needn’t take annual distributions but could wait until the last year or skip years as long as the IRA was depleted in 10 years. Estate planning attorneys and retirement professionals were fine with this provision.

What came next surprised them. If the IRA owner died after the start dates, annual RMDs must be paid to the beneficiary in years one through nine, with the account depleted in year 10. The beneficiary would calculate annual RMDs based on their own life expectancy. The younger the beneficiary, the smaller the RMD.

The latest IRS proposal on the 10-year clean-out rule still needs to be finalized. Practitioners want the ten-year rule to apply consistently, whether or not the IRA owner dies before or after the RMD beginning date.

There’s some relief. In October 2022, the IRS said beneficiaries of IRAs inherited after 2019, for which the decedent owner was already subject to RMDs, won’t be penalized for taking distributions in 2021 or 2022. The IRS has just extended that relief for such beneficiaries to 2023.

Confused about your own inherited IRA situation? Speak with an experienced estate planning attorney to ensure that you manage your inherited IRA per the latest IRS rules.

Reference: Kiplinger (July 30, 2023) “IRS 10-Year Rule for Inherited IRAs: Kiplinger Tax Letter”

Is It Possible to Split an IRA?

“Like most assets, you can inherit an individual retirement account (IRA) after the owner’s death. For spouses, inheriting an IRA is a relatively straightforward process.”

If you and a sibling have inherited an IRA, there are several options, says a recent article from yahoo! finance, appropriately titled “My Sibling and I Inherited an IRA. How Do We Split It?” The choices are different than when a spouse inherits an IRA. Making a mistake could be costly, so work with an estate planning attorney familiar with the process.

An IRA is a tax-advantaged retirement account owned and managed by an individual. It’s different from 401(k) accounts, managed through employers. The rules about inheriting an IRA are more complicated than any other form of investment because of the IRA’s tax status. The traditional IRA is known as a “pre-tax” portfolio. This is because you don’t pay taxes on the money invested into the account. You pay taxes on the account’s growth when making withdrawals.

Starting at age 72 or 73, you must take money out of the IRA every year. These are called Required Minimum Distributions (RMDs) and are required by law. The amount depends on your age and the amount in the account. If you inherit an IRA, distributions from the account will still be required.

From a policy perspective, these withdrawals are required to generate tax revenue. Otherwise, people would have “eternal” IRAs, which would continue to grow tax-free for decades and generations.

When siblings inherit an IRA, the first question is whether or not the siblings are “eligible designated beneficiaries.” A beneficiary is a person named in the account to receive it after the owner’s death.  The beneficiary then inherits the account directly. Under the SECURE Act, starting in 2020, certain categories count as “eligible designated beneficiaries.” This includes the spouse, any minor children, disabled or chronically ill individuals and anyone not more than ten years younger than the account owner. Adult children over 18 do not qualify as eligible designated beneficiaries.

Adult siblings may transfer the IRA into an Inherited IRA, using a single account they own jointly, or distribute the IRA among multiple inherited IRA accounts that each owns individually. The transfer must occur by December 31 of the year the IRA was inherited. Once the account is transferred, the siblings have ten years to withdraw and pay taxes on all the money in the inherited IRA account.

If the siblings wish to withdraw and use the assets, they may. However, they must pay ordinary income taxes on the assets, which could be considerable. The tax rate is set based on the sibling’s income for the year.

Minor children inheriting an IRA have another option. Their parent or guardian may transfer the IRA into an inherited IRA and take RMDs based on their life expectancy and the account’s value. The distribution must begin on December 31 of the year when they inherited the IRA. The money is taxed as income. Once the minor child reaches legal age, the ten-year rule applies. They must take all of the money out of the account within ten years of achieving their legal age.

Splitting an IRA between siblings requires the knowledge of an estate planning attorney to make informed decisions to protect the assets and minimize taxes.

Reference: yahoo! finance (April 24, 2023) “My Sibling and I Inherited an IRA. How Do We Split It?”

Get These Estate and Tax Items Done Before It’s too Late

“What estate planners need to accomplish for their clients before Tax Day, as well as the regulatory changes they need to be aware of while preparing for the big day.”

This year, tax day falls on April 18 because of the weekend and because the District of Columbia’s Emancipation Day holiday takes place on April 17. Don’t let these extra days go to waste, says a recent article from Investment News, “Top things for estate planners to do before Tax Day 2023.”

Now that the SECURE 2.0 Act has taken effect, there’s much to do before the April 18 deadline. Taxpayers should review their wills and trusts to confirm that their wishes are effectively stated. However, there’s more this year. Asset valuations, family circumstances and changed laws are all reasons to review these documents. While you’re preparing taxes and reviewing net worth statements is also an excellent time to review IRA Required Minimum Distributions (RMDs), and beneficiary designations and make an appointment to review your estate plan in light of current estate planning laws.

Current federal estate, gift and generation-skipping transfer tax exemptions are currently $12,920,000, while the current federal generation-skipping transfer tax exemption is also $12,920,000. This changes dramatically on January 1, 2026, when both numbers will be cut in half. Therefore, planning needs to be done well before the dates when these exemptions shrink.

Wealthy married couples may consider using the Spousal Lifetime Access Trust. This allows the couple to gift their increased exemptions before the reduction in 2026. If the trust is drafted properly, spouses will remain in a similar economic position as long as both spouses are alive and married to each other. The SLAT benefits the donor’s spouse, while also taking advantage of these high exemptions. For example, Betty creates and gifts assets to a SLAT. Depending on the terms of the SLAT, her husband Barney will receive income and possibly principal. While Barney is still alive and married to Betty, their lifestyle remains intact.

When Barney dies, all amounts payable to Barney end and the trust assets pass to the following or remainder beneficiaries named in the document. They may receive the trust assets outright or in further trusts. For example, the assets are held in trust for Betty’s children for their lives, and Betty’s GST is allocated to the SLAT. If the trust is created in this way, the children receive income and principal during their lives, and the trust may continue for Betty’s grandchildren without being taxed in their respective estates.

The IRS has issued guidance stating that, with certain exceptions, most completed gifts made now will not be subject to a clawback if the taxpayer dies after exemptions are reduced.

Various states have their own additional estate, gift and/or inheritance taxes and exemptions.  Your estate planning attorney will be able to explain what state-specific laws apply to your situation.

For families whose wealth is tied up in real estate property, assets can be titled differently to lower taxable estates. For example, transferring a home to a Qualified Personal Residence Trust can remove the asset from the taxpayer’s estate, while only a fraction of the home is counted as a gift. However, after the QPRT term, the grantor must pay rent to keep the home outside their estate.

For commercial property, contributing the property to an entity and then making gifts of partial interests in the entity may be helpful. However, the gifts of a portion of the entity may qualify for discounts for lack of control and marketability.

These are just a few steps to be taken before tax day 2023 and before the high exemption levels revert to pre-JCTA levels. Your estate planning attorney will know which steps are more effective for your family.

Reference: Investment News (Feb. 27, 2023) “Top things for estate planners to do before Tax Day 2023”

Is Extending Required Minimum Distributions a Good Thing?

“The first SECURE Act extended the beginning date for taking required minimum distributions from the year after the account owner reaches age 70½ until they reach age 72. Just three years later, ‘SECURE Act 2.0’ has extended this age to 73, and offers a further provision for extending it again, to age 75, beginning in 2033.”

The question is, are these extensions a good thing, or a trap for people who aren’t up on the latest rules? A key concept is the difference in how couples and singles are taxed. The income level at which singles reach tax bracket thresholds is half that of married people filing jointly, explains a recent article titled “Are Extended RMDs A Gold Mine Or Tax Trap?” from Financial Advisor.

For example, a retired couple reaches 70½ this year. They’ll have an RMD of $89,450 from their combined $2 million plus in IRAs. They also receive $27,700 in interest and dividend income during the year—exactly equal to the standard deduction for a married couple filing jointly. The federal income tax liability would be $10,294 (not including taxes on Social Security benefits).

Let’s say they opt not to withdraw the $89,450 during 2023. Instead, they wait and one of the spouses dies. The surviving spouse then withdraws $89,450 as a widow. The survivor’s federal income tax liability on the same amount becomes $18,192, or almost 77% higher than if both spouses were still living. The “single filer” penalty is an issue.

What’s more, the children of our example are likely to face a higher income tax rate on what’s left in their parents’ IRA when both pass away. They are likely to be in their peak earnings years at that point and have only ten years at most to take the entire payout after their parents die.

Finally, if the married couple takes IRA withdrawals earlier rather than later, they’ll see a step-up in basis for all the after-tax funds they’ve allowed to appreciate for the rest of their lives. This eliminates all income tax on the appreciation. This is an important income tax benefit you don’t get from IRA receipts after the death of the account owner. Perhaps this is what Congress had in mind when it extended the starting date for RMDs not once, but three times.

It could be argued that singles, including surviving spouses, will see IRAs grow more if they put off distribution even longer. However, eventually bigger amounts may push individuals or families into a higher income tax bracket later on, and the undistributed IRA would not get a step-up in income tax basis on the death of the original owners. The undistributed IRA amount also can’t be rolled into a Roth IRA.

Tax brackets strategies can be improved if the couple takes withdrawals before they turn 70 ½, as long as they are retired and not in a high-income tax bracket. By taking increasing RMDs later in life, it’s possible to increase the federal income tax bracket, and risk triggering the single-filer penalty on the widowed spouse.

Estate planning for the SECURE Act means if you haven’t had your estate plan reviewed in the last two or three years, it’s time to make an appointment with an estate planning attorney. These changes in the law may create new opportunities, or your existing estate plan may not be properly structured to address the changes brought about by Congress.

Reference: Financial Advisor (March 1, 2023) “Are Extended RMDs A Gold Mine Or Tax Trap?”

What are RMD Rules for 2023?

“The SECURE 2.0 Act, which was signed into law in December 2022, changes the RMD rules for retirement savers beginning in 2023.”

After a certain age, retirement account owners are required to take minimum distributions from traditional IRAs and 401(k)s. The SECURE 2.0 Act has changed the rules, reports the article “New RMD Rules for 2023” from U.S. News & World Report.

Before the SECURE 2.0 Act, the age to start RMDs was 72 for retirement accounts, including both traditional IRAs and 401(k)s. Now, the RMD age has increased in two steps. Starting in 2023, the RMD age increases to 73, and in 2033, the RMD age will increase to 75. If you were born between 1951 and 1959, you’ll need to start RMDs after age 73. Born after 1960? You can delay RMDs until after age 75.

There are important deadlines, and while you get extra time to take your first RMD, you must take subsequent RMDs every calendar year.

Here’s the twist: remember, RMDs are taxable. If you take your first RMD in 2023 because you celebrate your 72^nd birthday that year, you’ll have some decisions to make. You can take the RMD by December 31, 2024, or delay it to no later than April 1, 2025. But if you delay it to April 2025, you’ll take two RMDs in one tax year.

If your income from Social Security and other sources is more than you need, those higher ages for RMDs have their advantages. Retirement savings accounts may grow tax-free for a longer period of time. The change may also bring savings in Medicare costs. The price of Medicare premiums is tied to income. When retirees take distributions from pre-tax retirement accounts, it increases their income and their premiums. By waiting on withdrawals, income can be lowered, leading to lower Medicare premiums at that time.

However, the delay in taking distributions may also lead to higher taxes during later stages of retirement. If you don’t take funds early, you may find yourself with higher RMDs later, leading to larger tax bills.

Account owners who don’t take an RMD at the right time usually face harsh penalties. Prior to the SECURE 2.0 Act, the tax penalty was 50% on their required amount not withdrawn. Now the penalty is 25%. If the mistake is corrected quickly, the penalty can even decline to 10%, as long as the person can demonstrate the missed RMD was due to an error and reasonable steps are being taken to resolve the issue.

There are changes to qualified charitable distributions as well. Account owners age 70 ½ and older may now make IRA qualified charitable distributions of up to $100,000 per year without owing income tax on the transaction, which can count as their RMD for the year. The qualified charitable distribution limit is now linked to inflation and may increase in future years. A one-time gift of $50,000 may be made directly to an eligible entity through a charitable gift annuity, charitable remainder unitrust or charitable remainder annuity trust.

Based on the SECURE Act 2.0, Roth 401(k) account owners no longer have to take RMDs at all. This aligns the Roth 401(k) with Roth IRAs, which also do not require any distributions in retirement.

Reference: U.S. News & World Report (Feb. 10, 2023) “New RMD Rules for 2023”

Beneficiary Mistakes to Avoid

“Before making a decision on a beneficiary, it's very important to check your state laws. Some states have different rules on who you can name as a beneficiary.”

Planning for one’s eventual death can be a somber task. However, consider what would occur if you failed to plan: loved ones trying to figure out your intentions, a long and expensive legal battle with unintended heirs and instead of grieving your loss, wondering why you didn’t take care of business while you were living. Planning suddenly becomes far more appealing, doesn’t it?

A recent article from yahoo! finance, “5 Retirement Plan Beneficiary Mistakes to Avoid,” explains how to avoid some of the issues regarding beneficiaries.

You haven’t named a beneficiary for your retirement accounts. This is a common estate planning mistake, even though it seems so obvious. A beneficiary can be a person, a charity, a trust, or your estate. Your estate planning attorney will be able to help you identify likely beneficiaries and ensure they are eligible.

You forgot to review your beneficiary designations for many years. Most people have changes in relationships as they move through the stages of life. The same person who was your best friend in your twenties might not even be in your life in your sixties. However, if you don’t check on beneficiary designations on a regular basis, you may be leaving your retirement accounts to people who haven’t heard from you in decades and disinheriting loved ones. Every time you update your estate plan, which should be every three to five years, check your beneficiary designations.

You didn’t name your spouse as a primary beneficiary for a retirement account. When Congress passed the 2019 SECURE Act, the bill removed a provision allowing non-spousal beneficiaries to stretch out disbursements from IRAs over their lifetimes, also known as the “Stretch IRA.” A non-spouse beneficiary must empty any inherited IRA within ten years from the death of the account holder. If a minor child is the beneficiary, once they reach the age of legal majority, they are required to follow the rules of a Required Minimum Distribution. Having a spouse named as beneficiary allows them to move the inherited IRA funds into their own IRA and take out assets as they wish.

You named an estate as a beneficiary. You can name your estate as a beneficiary. However, it creates a significant tangle for the family who has to set things right. For instance, if you have any debt, your estate could be attached by creditors. Your estate may also go through probate court, a court-supervised process to validate your will, have your final assets identified and have debts paid before any remaining assets are distributed to heirs.

You didn’t create a retirement plan until late in your career. Retirement seems very far away during your twenties, thirties and even forties. However, the years pass and suddenly you’re looking at retirement without enough money set aside. Creating an estate plan early in your working life shifts your focus, so you understand how important it is to have a retirement plan.

An experienced estate planning attorney can help square away your beneficiary designations as part of your overall estate plan. The best time to start? How about today?

Reference: yahoo! finance (Dec. 19, 2022) “5 Retirement Plan Beneficiary Mistakes to Avoid”